Essar said facing raw materials shortage

NEW YORK  Essar Steel Algoma Inc. is said to be facing a raw materials shortage for the first quarter, causing the steelmaker to produce and sell less material in the first three months of 2014, sources told AMM.

Some sources indicated that the shortage was a financial issue, noting that the closure of navigable waterways during the winter months means that the Sault Ste. Marie, Ontario-based flat-rolled producer needs to either procure a larger volume of iron ore or coal ahead of time or face increased transportation costs to get the product via rail.

Essar Steel Algoma said in its fiscal second-quarter earnings report that it was operating with a "low level of liquidity" and a "low level of raw material inventories" as of Sept. 30.

"Raw material inventories will have to be built up to acceptable levels in order to sustain operations until mid-April 2014," it said in the report. "Certain arrangements have already been made or are under way with both related parties and various third parties to address any potential shortfall in working capital; however, there can be no assurances that sufficient financing will be available to the company or that such funds will be available on acceptable terms."

Essar Steel Algoma added that it requires a "substantial amount" of coal and iron ore as waterways close from mid-January to the end of March, adding that supply disruptions could have an adverse effect on its operations.

As a result, some of the companys customers were told that hot-rolled coil lead times have been extended into the middle of February, although other customers are still able to receive January delivery times.

"Although we do not comment publicly on production levels, I can confirm we are currently booking January tons," an Essar Steel Algoma spokeswoman said via e-mail Dec. 5. She declined to comment on the companys liquidity issues.

However, buyers noted that theyve been told that the steelmaker has been forced to cut production as a result of the financial issues, which has pushed out lead times and is causing delays.

"Much of the reason is that theyre not going to be producing at 100 percent. Theyre having some financial issues, and because of that theyre not able to bring in the raw materials they need," one Midwest service center source said. "They cut their production but the story keeps changing."

Spot buyers in southern Ontario, as well as market participants in the U.S. Midwest and Northeast, might feel extra pressure because Essar Steel Algoma is heavily invested in the spot market, sources indicated, underscoring that extended lead times would be difficult in an environment with razor-thin inventory levels.

"My (Essar Steel Algoma) sales rep was being very cagey with me about lead times," a second Midwest service center source said. "There must be something going on because their lead times are into February."

However, some customers reported this week that they were still able to purchase product with January delivery times, adding that certain customers are receiving priority on the tons of metal available.